Keith Mullin

Thirty-two. Count ’em. 32 announcements over a few frenetic days this past week from the Bank of England. Plus others from the Financial Conduct Authority ( FCA ) and other agencies responsible for the UK’s financial and capital markets, mostly coordinated to align with the unveiling of the government’s so-called Leeds Reforms to financial markets and UK finance minister Rachel Reeves’ propagandist Mansion House speech.

I’ll say right up front that I fear the end-game of a lot of today’s government actions could be a future mis-selling scandal of epic proportions.

The Bank of England ( BoE ) showered us with draft statements of policy, policy statements, supervisory statements, consultation papers, responses to government letters, pronouncements, explainers, and more in a tidal wave of wordage. Topics variously covered ( in no particular order ):

• Financial market infrastructure firms ( central clearing counterparties, payments providers );
• Digitalization ( tokenized securities, stablecoins, a digital gilt );
• Pushback in the implementation of the Fundamental Review of the Trading Book ( UK FRTB ), the market risk element of Basel III, to January 1st 2028;
• Measures to promote banking resilience, capital certainty, competition, and growth, including lower capital requirements for smaller banks;
• Updates to the resolution framework ( following the resolution of Silicon Valley Bank UK and its acquisition by HSBC in 2023 ) to allow the Bank of England to recapitalize troubled banks using industry funds;
• Relaxing the Senior Managers and Certification Regime;
• Restating requirements vis-à-vis the Capital Requirements Regulation and Solvency II;
• Encouraging high loan-to-income residential mortgage lending, with lenders protected by a taxpayer guarantee;
• And a lot more.

The FCA, meanwhile, published its final Prospectus Rules, loosening the burden such that listed companies no longer have to publish fat prospectuses to be able to issue more shares. The threshold to issue a prospectus has been raised to 75% of existing share capital from 20%. The time between a prospectus being issued and an IPO has been halved to three days; the FCA has set up a public offering platform to help smaller growth companies raise capital; and companies can more easily issue bonds to retail investors ( via a single disclosure standard for prospectuses covering large and small bonds ).

Risk and deregulation: poor bedfellows

As I mentioned, this burst of activity was coordinated to align with UK finance minister Rachel Reeves and her colleagues in HM Treasury, who:

- Unveiled the so-called Leeds Reforms ( to “rewire the financial system, boost investment and create skilled jobs across the UK” and “make the UK the number one destination for financial services businesses by 2035” – all their words ) under the aegis of the Financial Services Growth and Competitiveness Strategy plan;

- Announced plans to boost homeownership; propaganda alert: “Red tape swept away in biggest financial regulation reforms in a decade to boost homeownership and put more money into people’s pockets through the government’s Plan for Change”.

- Delivered the set-piece Mansion House speech, where Reeves summarized the actions while extolling the government’s achievements. ( A harsher person than I would say that as the government’s achievements are largely invisible, they were dressed up as evolved half-truths and phantom-truths delivered as heavily nuanced fact, or maybe call it government truth. )

Fixation on growth at all costs

The sheer depth and breadth of last week’s output, including supporting reports, was overwhelming, but in essence, it was a continuation of the government’s drive to fulfil its political fixation to bring about economic growth at any cost, albeit without success to date.

Through rampant deregulation ( Reeves: “Regulation still acts as a boot on the neck of businesses choking off the enterprise and innovation that is the lifeblood of economic growth” ). By embracing ( or better put, consumers being coerced into embracing ) greater investment and housing risk, ensuring the boot shifts to our necks instead. And by lowering capital requirements for banks and watering down legal responsibilities for senior management in banks to act with integrity.

The government is plodding ahead with its misguided notion that by changing the rules and browbeating regulators and savings providers to join forces to coerce savers into withdrawing their savings from safe fixed-rate bank deposits to bet it all in the stock market, we’ll all be better off in the long run. Reeves’ trotting out that moving £2,000 from a low interest-bearing account into stocks and shares could make millions of people over £9,000 better off in 20 years’ time, was reckless and utterly disingenuous. Because it might not. People could lose their shirts.

The language around risky investments will be reviewed ( doubtless to make them sound less risky ) while savings providers will soon start advertising the benefits of risk investing and badgering customers with funds in low-interest accounts through so-called Targeted Support – no doubt using hard-sell tactics – to put their money at risk. As I say, I smell a future mis-selling scandal.

Regulatory race to the bottom

Particularly as the regulatory race to the bottom continues. I have resolute doubts about the combined impact of all of the government actions. There’s a long list of worrisome actions here, including:

• The first phase of reforms, set out by the FCA and Prudential Regulation Authority ( PRA ) to “streamline” the Senior Managers and Certification Regime ( SM&CR ), ostensibly to make it more effective and efficient to drive growth in financial services. Let’s not forget why the SM&CR was introduced: to strengthen integrity and hold senior managers and other staff to account for their conduct following the global financial crisis and Libor rigging saga when the failure of senior management to take any responsibility for – or even be aware of – their staff’s actions, some of which were flagrantly illegal – was laid bare.

The government reckons the SM&CR is too expensive and creates unnecessary costs so it is cutting the burden on firms in half! It plans to do away with the Certification Regime ( which covers specific non-senior management functions (SMFs ) but which can have a significant impact on customers and/or the firm), and increase the flexibility for regulators to reduce the number of SMFs that require pre-approval. What impact, though, will making the regime less onerous have on management integrity, sell-side behaviour, and client harm? We’ve been here before. It didn’t end well.

• Review of FCA Consumer Duty rules which, we’re told, are impinging on the way financial services businesses interact, e.g., the interplay between retail and consumer finance, investment banking, and asset management. So, the FCA is assessing how the Consumer Duty applies to wholesale firms, no doubt with the intent to water its duty down in the quest to get us to bet our shirts on risky investments. The Consumer Duty – again, let’s not forget – is intended to raise standards in how finance companies treat retail consumers.
• Weakening the hand of the Financial Ombudsman Service, the independent agency set up to resolve financial complaints, by forcing it to find a financial service firm’s conduct fair and reasonable if it has complied with relevant FCA rules, and forcing it to refer and defer to the FCA on regulatory intent. The government wants the FOS to act less as a quasi-regulator in determining outcomes.
• Relaxing the UK ringfencing regime to cut costs. This arrangement forces UK banks to legally ringfence retail bank customers from harm from risk-seeking boom-and-bust investment banking. Weakening protections potentially puts retail and consumer customers in the line of fire if investment banks, under a less stringent senior managers’ accountability regime, suffer losses due to a return to risk-seeking behaviour.
• Implementation by the FCA and PRA of Financial Policy Committee recommendations to increase high loan-to-income residential mortgage lending, i.e., at or above 4.5x. A permanent government-backed Mortgage Guarantee Scheme, being introduced from this month, will incentivize lenders to make 91% to 95% loan-to-value mortgages by providing them with a taxpayer-backed guarantee that insures them against a portion of losses on those mortgages. Note: the scheme will protect lenders but not over-leveraged homeowners.
• Including Long-Term Asset Funds in stocks and shares in Individual Savings Accounts ( ISAs, tax-efficient savings and investment vehicles ). LTAFs, a new type of investment vehicle, allow retail investors to access previously closed-off institutional asset classes like private equity, private credit, venture capital, infrastructure, real estate and forestry. They can be risky.

Lower capital requirements for smaller banks

I get that smaller firms present lower financial stability risks and accept that the regulatory burden on them needs to be proportionate. A key plank of that, the so-called Strong and Simple prudential framework for non-systemic UK banks and building societies, will be implemented from January 1st 2027.

But I do have nagging doubts about the proposals to raise the threshold at which UK banks are required to meet the Minimum Requirement for own funds and Eligible Liabilities ( MREL ) capital regime from £15-25 billion in total assets to £25-40 billion ( to provide, the BoE says, greater clarity and flexibility on whether banks will need transfer or bail-in strategies” ); and to double the so-called Resolution Assessment Threshold to £100 billion of retail deposits so that only the largest and most complex firms need to disclose their preparations for resolution, even though both sound harmless enough on paper.

It's facile to say, as the Chancellor did, that lowering capital requirements will, in principle, allow banks to lend more and increase investments in the economy at the same time as increasing competition and innovation. But making banks less robust from a capital perspective when the government is demanding that we all embrace greater risk, and the banks to which the lower capital requirements will apply are likely to be those extended higher multiple mortgages?

Oh, and finishing with one for luck: for those interested in environmental and sustainable finance, the UK government has ditched plans for a green taxonomy. A big reversal.